Professional Documents
Culture Documents
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ACCA
F9
Financial Management
Key Point
Notes
June 2010
These notes are not intended to cover the whole syllabus, but target key examinable areas.
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Sunilto
Copyright Bhandari – IAT
Intelligent Ltd
Accountancy Tutors Ltd
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Index
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Exam Technique
First 15 minutes
Read the questions carefully
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General
Numerical Questions
State formula
Show method
Explain as you go
Written Questions
Check format – report / essay/ listed points
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Tips
These will be posted on my website sometime in late
April/early May 2010.
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Chapter One
Financial Objectives
1 Primary Financial Objective
Compute Using:-
1.4 Check the question very carefully for the size of the
company is it:-
Listed*
Private Company
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2 Indicators
Market Share
Customer Satisfaction
Quality Measures
Economic Variables
Regulators
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Directors pay
Taking high risk business decisions
Non-payment of dividends
Using debt finance (against the wishes of the
S/H)
Company Law
Corporate Governance (eg UK Combined Code)
Share Options (ESOPS)
3.3.4 ESOPS
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Investment
Finance
Dividend
4.2 Investment
Company Liquidity
Future Profits and Asset values
Business Risk Profile i.e. effect upon
variability of the cash flows and profits.
4.3 Finance
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4.4 Dividends
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Chapter Two
Dividend Policy
1 Introduction
2 Theories
2.1 Residual – If spare cash exists at the end of the year pay
dividend.
Po= Do (1+g)
(re-g)
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2.3 Irrelevancy
3 Practical Considerations
Availability of Cash
What dividends to S/H want (clientele effect)?
Signalling effect –payment of dividends indicates a
healthy company
Retaining cash is a key source of Finance.
Dividend growth should be greater than inflation
Tax impact upon S/H
Effect the dividend will have on dividend
cover(EPS/DPS)
Number of investment opportunities will restrict
dividend payments.
Risk-paying now is safer than promising to pay next
year
Is the dividend within the company law regulations?
4.1.2 This will allow the S/H to sell extra shares for cash and
the gain will be subject to CGT.
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4.2.1 If the board has “one off” period of excess cash, they
could consider a share buy back.
4.2.2 Considerations:-
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Chapter Three
Cost of Capital
Ke=Cost of Equity
Kd=Should be “Kd(1-t)”=Cost of Debt
Ve=Market Value of Equity
Vd=Market Value of Debt
2 Market Values
Hence Vd=35,Ve=65
For WACC equation
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3.2 CAPM
Ke=Rf+ (Rm-Rf)βe
3.3 DVM
Also note:-
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Time $
To Po (X) Take two guesses at
the Kd(1-t) like
T1-Tn Ints x (1-t) X 10% & 1% and
Perform IRR computation
Tn Capital Repayment X
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5.3 In all the past F9 exam questions, it has been very clear
within the question details that the conditions exist to
use the WACC. If the WACC can’t be used then the Risk
Adjusted Cost of Equity per Chapter 5 may be used.
6 What if’s?
Equity
Preference Capital
Bank loans
Traded Bonds
> Kp=D.P.S
Po
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Chapter Four
1 Bonds
2 Market Value
Po= Ints
Yield
Time $ Yield% PV
Ti-Tn Ints X X X
Tn Capital X X X
Repayment*
Po = XX
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Yield = Ints
Po
Time $
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Chapter Five
1 Uses
2 Process
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3 Concerns
a) Does it exist?
b) Does the proxy company specialise in the non-
core field or does it have many different business
activities
c) If we are not listed-how do we gear up the βa
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4 Examiners Article
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Chapter Six
CAPM
1 CAPM Equation
Take/Find βe
Put into CAPM
Minimum Return = Rf+(Rm-Rf)βe
Forecast a return for the investment (could use
past returns)
Forecast exceeds/equals
minimum return-Buy or Keep the share
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c) Forecast exceeds/equals
minimum return-Buy or keep the portfolio.
3 Meaning of a βe
Macroeconomic variables
Political factors
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4 Criticisms of CAPM
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5 Examiners Articles
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Chapter Seven
Capital Structure
1 Introduction
2 Practical Issues
Debt/Equity+Debt OR Debt/Equity
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a) Yield<Ke
b) Gearing causes Ke to rise
Key Points:-
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Key points:-
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Chapter Eight
Project Appraisal
a) Initial Investment
b) (Initial Investment +Scrap Value)
2
1.3 Decision rule is:-
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2 Payback
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Format B
Time CF R% PV$’000
To (X) 1.0 (X)
T1-Tn X X X
T2-Tn X X X
NPV $XXX
3.3 Incremental Cash Flows
1) Compounding
Eg: Inflation is 5% pa
Real cash flow at time 7 is $250
Money cash flow =$250 x 1.057= $352
2) Discounting (tables)
3) Annuity (tables)
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4) Delayed Annuity
5) Perpetuity
6) Delayed Perpetuity
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1 x DF4 at 12%
(r-g)
1 x 0.636
(0.12-0.03)
= 7.067
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Exclude Inflation
i. Invest at To
ii. Adjust each year
iii. Close at end of the project.
T0 T1 T2 T3
- 300 350 375
Relevant (300) (50) (25) 375
CF’s
a) TAD-straight line.
eg: CAPEX is $1m.Scrap value at T4=$200K.TAD
is 4 years and tax rate is 30% (No delay)
b) TAD-Reducing Balance
eg: Asset is bought at T0 (1/1/09)cost
$1m.Sold at T4 for $200k.TAD is 25% reducing
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5 Capital Rationing
5.2 Causes:
Hard Soft
Approach:-
Approach:-
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6 Asset Replacement
6.2 Process
b) E.A.NPV = NPV
Format
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Notes:
Required:
(iii) You later discover that the discount rate used was
nominal but the cash flows have been calculated in
real terms.
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Chapter Nine
Business Valuations
1 Equity
1.2 DGM/DVM
Po= Do (1+g)
(re-g)
2 Others
PO = D
rp
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PO per $100:-
Time $ rd PV
T1-Tn Ints X X X
Tn Capital Repayment X X X
PO X
Weak
Semi-Strong
Strong
Chapter Ten
Sources of Finance
1 Introduction
2.2 Carry the greatest risk but also the best possible
returns.
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b) Issue Price
No £
3 at 600p 18.00
1 at 550p 5.50
4 £ 23.50
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4 DEBT
b) Security via
Fixed charged
Floating charge
Securitisation of future income.
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5 Leases
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3 Step approach
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Chapter Eleven
Ratios
1.1 Investor
P/E = Po
EPS
1.2 Gearing
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1.3 Profitability
1.4 Liquidity
2 Important
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Solution
CA=1.25($260K)
CL=1.00(?)
CL=$260K=$208K
$1.25
Bank O/D=$208K-$108K
=$100K
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Chapter Twelve
Working Capital
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Chapter Thirteen
Inventory Control
1
INVENTORY MANAGEMENT
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EOQ
Fixed order
3) Finally, calculate
costs the total annual
cost using the EOQ
calculated in 2)
EOQ Q AND the total
annual cost
ordering in
quantities higher
than the EOQ but
where greater
discounts are
available.
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Demand Driven
(1) No Finished (3)
Goods inventory
Close Link
with suppliers
JIT
(7)
(Factors)
No or Ltd JIT
Raw material Production (4)
Inventory(6) NO WIP(5)
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Chapter Fourteen
Receivables and Payables
1 Receivables
Invoice promptly
State terms on the invoice
Send out monthly statements
Call customers to chase payment
Consider legal proceedings as a last resort.
Solution
365 = 24.33
(45-30)
(1+0.01)24.33-1 x 100
=27.4%
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2 Payables
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Chapter Fifteen
Cash Management
1 GENERAL
Surpluses Deficits
Consider: -
Amount Uses: -
Time 1. Extend trade
Access payables
Return finance.
Risk
2. Bank facils.
Investments
Deposits 3. Factoring
Building society co’s.
a/c’s
Inter bank
market
Gilts
Aim
London SE
Futures
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2 CASH BUDGETS-LAYOUT
Receipts
Cash sales
Sale of assets
Payments
Cash purchases
Payments to creditors
Expenses
Purchase of assets
Tax
Dividends
Interest
Balance b/f
Balance c/f
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Exam Technique
3 CASH MODELS
Max Bal
Spread
Min Bal
Time
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Max Bal
SPREAD
Return
Point
One third
of spread
Min Bal
Time
Formulae are:
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Chapter Sixteen
Foreign Currency Risk
1. Translation Exposure
2. Transaction Exposure
Change in the value of the spot rate over the short term
(less than a year) causing a cash gain or loss.
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3. Economic Exposure
(Bid) (Offer)
$1.5000 - $1.5555 / £
Reciprocal and
cross over!!!!! £0.6429 - £0.6667 / $
(Bid) (Offer)
5.4 Netting
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“Fix the rate today that will apply on a set future date”
Technique: -
Technique
Home Abroad
Today Today’s Spot
£Answer FX
1+ints home
÷ 1+ ints foreign
Future Date
£ Answer FX
FX
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Pros Cons
Forward Market
Fixed Rate, certainty Inflexible/contract
Easy Lose out on the
Cheap upside potential or
Tailored(Any size of gain
transaction) Must ensure FX
receipts arrive
MMH
Convert today Complicated
Cheap May not apply for FX
Tailored receipt as borrowing
Flexible may not be possible
abroad
S0=Spot Today
S1=Spot 1 years time
hc=annual inflation rate foreign
hb=annual inflation rate base/home country
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9.1 Futures
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9.2 Options
With an option:-
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Chapter Seventeen
Interest Rate Risk
1
What are the issues?
Note
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eg FRA 3-9 @ 4% pa
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Contract sizes
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T Now T 6 months
Match up!!!!!
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Purchased from
a merchant bank for Covers the adverse
a fee side of interest rate
changes, but at a cost!!!
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4. Yield Curves
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